Snapshots
of Environmental
Cost Accounting
A Report to:
US EPA
Environmental Accounting Project
S
NAPSHOTS OFE
NVIRONMENTALC
OSTA
CCOUNTINGPrepared for:
United States Environmental Protection Agency
Office of Pollution Prevention & Toxics
Environmental Accounting Project
Robert G. Graff Edward D. Reiskin Allen L. White, Ph.D. Katherine Bidwell May 1998 Tellus Institute 11 Arlington Street Boston, MA 02116-3411
DISCLAIMER
This report presents a number of Environmental Cost Accounting snapshots and case studies developed in recent years by a diverse group of organizations. The concepts, terms, and approaches represented throughout the report represent many different philosophies and means of applying Environmental Accounting (EA) principles and do not necessarily
represent the position or views of the US Environmental Protection Agency (EPA). Through the production of this report, the EPA is presenting many different possible approaches to EA without intending to endorse any one. Readers may also want to consult An Introduction to Environmental Accounting as a Business Management Tool: Key Concepts and Terms, EPA 742-R-95-001 (June 1995) for more general information about environmental accounting.
This document and information on the US Environmental Accounting Project can be accessed via the Project’s website at http://www.epa.gov/opptintr/acctg.
ACKNOWLEDGMENTS
This document benefited immeasurably from the reviews, comments, and assistance of stakeholders from a variety of organizations. We especially thank Holly Elwood, Kristin Pierre, and Susan McLaughlin of US Environmental Protection Agency’s Environmental Accounting Project for their guidance and comments on earlier drafts of this report.
EPA would like to specifically thank the following individuals for providing comments on earlier drafts of this report.
Steve Allen
Texas Natural Resources Conservation Commission
Laurie Case
Illinois Waste Management & Research Center
Robert Currie Baxter International Melinda Dower
New Jersey Department of Environmental Protection
Wendy Fitzner
Michigan Department of Environmental Quality
Terri Goldberg
North East Waste Management Officials Association
Robert Kainz
Chrysler Corporation David Leviten
Pacific Northwest Pollution Prevention Resource Center
Chris Montovino
Pacific Northwest Pollution Prevention Resource Center
George Nagle
Bristol-Myers Squibb Co. Jerry Parker
Washington State Department of Ecology Randy Price
Allied Signal Inc. Brian Rolingson AMOCO Corporation Nicholas A. Shufro
United Technologies Corporation Glenn Stephens
PA Department of Environmental Protection Tom Tramm
Commonwealth Edison Jeannie Wood
TABLE OF CONTENTS
DISCLAIMER ... 1
ACKNOWLEDGMENTS ... 1
TABLE OF CONTENTS... 1
WHAT IS THE PURPOSE OF THIS REPORT? ... 1
1. INTRODUCTION... 2
WHY MEASURE ENVIRONMENTAL COSTS? ... 2
WHAT IS ENVIRONMENTAL ACCOUNTING? ... 3
HOW CAN EA SUPPORT BUSINESS DECISION MAKING? ... 4
EA Informs Product/Process Costing ... 5
EA Informs Capital Investment Decisions ... 5
EA Informs Strategic Planning ... 6
2. OVERVIEW OF CASES ... 9
CASE SELECTION... 9
ORGANIZATION OF THE CASES... 9
Business Decisions Examined ... 9
Industry Sectors Examined ...10
Size of Companies Examined ...10
PROFILE OF THE CASES...11
Why Was the Case Study Performed? ...11
Costs Considered...11
Financial Results...12
3. ENVIRONMENTAL ACCOUNTING SNAPSHOTS ...15
SELECTION RATIONALE...15
A DIVERSIFIED CHEMICAL COMPANY...17
POLAROID CORPORATION ...19
ALUMINUM PROCESSING COMPANY ...22
DEBOURGH...24
HYDE TOOLS, INC. ...26
A JEWELRY COMPANY ...28
MAJESTIC METALS ...30
MANUFACTURER OF PRECISION METAL PARTS ...33
A METAL FABRICATION COMPANY ...35
PRODUCTION PLATING, INC. ...37
WILLIAMS PRECISION VALVE COMPANY, INC...39
A FLEXOGRAPHIC PRINTER ...41
A SCREEN PRINTER ...43
A SMALL LITHOGRAPHIC PRINTER ...45
QUEBECOR PRINTING MOUNT MORRIS, INC...47
MANUFACTURER OF MILITARY AND CIVILIAN ELECTRONIC EQUIPMENT ...50
BRISTOL-MYERS SQUIBB COMPANY...65
TIZ’S DOOR SALES, INC. ...67
AMOCO OIL COMPANY ...69
CIBA-GEIGY (NOVARTIS)...71
A RESINS MANUFACTURER ...73
S.C. JOHNSON WAX...76
A FORESTRY COMPANY ...78
SOUTHWEST HYDRO, INC...80
BAXTER INTERNATIONAL ...82
CHRYSLER CORPORATION...84
LARGE FIRM IN AUTO INDUSTRY ...86
CELANESE ENGINEERING RESINS, INC...88
DUPONT DE NEMOURS...90
WITCO CORPORATION ...92
THE ROBBINS COMPANY...94
SANDOZ PHARMACEUTICALS ...97
UNIFOIL CORPORATION ...99 APPENDIX A – GLOSSARY OF TERMS ... A-1 APPENDIX B – FEEDBACK AND INFORMATION FORM...B-1
WHAT IS THE PURPOSE OF THIS REPORT?
This report demonstrates the financial results of actual environmental accounting applications. It highlights 39 cases of companies using various forms of environmental accounting (EA) and offers a more detailed review (snapshot) of all of these cases. The snapshots represent applications of EA in small, medium, and large businesses in a variety of industries, and in a range of business decisions. Examples run the gamut from a small manufacturer of wooden doors examining an investment in a new lacquer process, to a large, multinational health care products company measuring the value of its proactive environmental management program.
The intent of this report is to document how the application of EA principles can have a direct, positive, bottom-line effect on business operations. This collection of existing snapshots will form the basis of a larger, “living” database of EA snapshots to which individual companies can both refer and contribute. This database will be made accessible on the Internet at http://www.epa.gov/opptintr/acctg.
This report was funded by EPA’s Environmental Accounting Project to respond to requests from stakeholders for more information on the application of environmental accounting concepts in various business decision making processes.
The Environmental Accounting Project began in 1992 in response to concerns that pollution prevention would not be adopted as the first choice of environmental management by industry until the environmental costs of non-prevention approaches and the economic benefits of pollution prevention become evident to managers. The mission of the Project is to encourage and motivate business managers to understand the full spectrum of environmental costs, and integrate these costs into decision making.
The collection of cases can serve engineers, accountants, financial analysts, operations managers, environmental managers, and general managers as a reference source on the range and business benefits of applying EA concepts.
Section 1 briefly introduces the reader to environmental accounting. Section 2 follows with an overview of the 39 cases, including a profile of the facilities studied, the EA methods they used and the results achieved. Section 3 presents snapshots of all cases, representing a diversity of companies, applications, and outcomes. Appendices containing a glossary and a form for reader feedback round out the report.
In addition to the EA snapshots in this report, the Environmental Accounting Project has developed case studies that examine how AT&T and Ontario Hydro (a Canadian public utility) have developed corporate-wide environmental accounting programs. To access these case studies or for more information on EPA’s Environmental Accounting Project and additional resources, visit the Project’s website at:
http://www.epa.gov/opptintr/acctg/ or contact EPA’s Pollution Prevention Information Clearinghouse:
phone: 202/260-1023 fax: 202/260-4659
email: ppic_group@epamail.epa.gov
If you are interested in offering a snapshot of one of your firm’s EA applications to the Environmental Accounting Project’s Snapshot Database, please contact the Environmental Accounting Project by phone at 202/260-4164 or by fax at 202/260-0178.
1. Introduction
A business’s long-term profitability depends on the quality of the product or service it offers, the demand for the product or service, and its ability to produce efficiently. Efficient production means maximizing output for a given level of input, or conversely, minimizing input for a given level of output. Firms that consistently produce efficiently create a sound competitive advantage for their enterprises.
A critical element of efficient production is the accurate and consistent measurement of inputs and outputs. The often repeated axiom “what gets measured gets managed” has never been more true. Without accurate cost information, it is difficult to adequately assess the profitability of a product, a department, or a firm, and even more difficult to know what changes to make in order to improve profitability in today’s highly competitive business climate. Management accounting systems can provide the information required to make those decisions.
Why Measure Environmental Costs?
Environmental costs are impacts incurred by society, an organization, or an individual resulting from activities that affect environmental quality; these impacts can be expressed in monetary or non-monetary terms. They include any such cost, direct or less tangible, with short- or long-term financial consequences for the firm. These costs are often not tracked by or are hidden in overhead accounts within traditional management accounting systems, but they can be a significant component of a firm’s overall cost structure. The failure to include them in financial analyses has the effect of sending the wrong financial signals to managers making process improvement, product mix, pricing, capital budgeting, and other routine decisions. In an increasingly global economy, where labor, materials, and capital costs are likely to converge over time, effective management of environmental costs and performance may become increasingly important in determining corporate winners and corporate laggards.
Mounting pressures on industry to achieve strong environmental performance have a number of ramifications for the business community. First, some costs of doing business that have traditionally been external to the firm – e.g., health effects of air pollutants – are being shifted to the firm’s balance sheet and income statement through regulation. This shift is the result of more stringent rules regarding pollutants already regulated and new rules affecting previously unregulated pollutants.
Second, just as the outcry over questionable and secretive management of corporate finance led to financial disclosure regulations early this century, today’s stakeholders are demanding public disclosure of environmental performance information. The result of this trend is that activities with direct or indirect adverse environmental effects are becoming more costly to operations, to capital budgets, and to stock prices1.
Even absent external pressure, the true costs of environmental impact – including the costs of waste, of liability, of diminished image – though often obscured by biases associated with traditional systems are real and can be significant. Actively managing these costs is therefore an important aspect of maintaining a lean, profitable business. Whether driven by internal motivation
or external concerns, a firm can create a sustained competitive advantage by systematically reducing environmental costs. And the first and critical step of cost reduction is improved cost identification and management.
What is Environmental Accounting?
Environmental Accounting (EA) is a broad-based term that refers to the incorporation of environmental costs and information into a variety of accounting practices. Figure 1 below depicts some of the different contexts in which EA is used. At a macroeconomic level, EA is used to account for costs associated with a region’s stocks and flows of natural resources. A redefinition of national income that incorporates such environmental accounts into conventional measures such as the Gross Domestic Product is an example of macroeconomic EA.
Environmental Accounting Region/Nation (macroeconomic) Firm (microeconomic) Financial Accounting Environmental Cost Accounting Management Accounting Materials Accounting
Figure 1. Some Contexts of Environmental Accounting
At the microeconomic or firm level, EA can apply to both financial accounting and management accounting. Financial accounting, whereby a firm reports its economic activity to an external audience, has requirements for disclosure of environmental liabilities and certain environmental costs. This application of EA is governed by the “Generally Accepted Accounting Principles”
tracking material flows through a facility in order to characterize inputs and outputs for purposes of evaluating both resource efficiency and environmental improvement opportunities.
Environmental cost accounting (ECA) is how environmental costs – including those that are often hidden in general overhead accounts – are identified and allocated to the material flows or other physical aspects of a firm’s operations (as might be identified via materials accounting). The application of these internal EA concepts provides consistency between an organization’s environmental goals and its financial goals, meaning environmental improvement can directly lead to financial improvement. It is this direct link between the financial and the environmental performance that makes robust environmental accounting practices so compelling.
Financial accounting and its environmental requirements have been standardized to provide consistent and comparable information to investors, regulators and other stakeholders, while management accounting practices vary widely from firm to firm. Likewise, the manner in which firms apply EA principles differs. A few firms make efforts to identify their relevant environmental costs and to use this additional information to guide business decisions. Most firms, however, operate without recognizing the magnitude or source of these costs, which can lead them to poorly informed decisions. Correcting this information gap is the primary purpose of EA.
How Can EA Support Business Decision Making?
The concepts of EA as they apply to internal management decisions are the focus of this document. In this context, EA concepts can be applied at all levels of an organization to help make sound business decisions such as those in Table 1 below. Accurate, timely information is the critical underpinning of business decision making, and EA practices provide means of exposing information obscured by conventional management accounting practices.
Table 1. Business Decisions Supported by EA2
Product Design Capital Investments
Process Design Cost Control
Facility Siting Waste Management
Purchasing Cost Allocation
Product/Process Costing Product Retention/Mix Risk/Liability Management Product Pricing
Strategic Planning Performance Evaluations Supplier Selection Plant Expansion
Environmental Program Justification
The cases included in this document relate to only a few of these business decisions. While applications relating to capital investments, product/process costing, and strategic planning have been better documented than the rest, a broad range of business decisions can benefit from the adoption of EA principles. As the preceding table and graphic indicate, environmental accounting
2
742-R-can play a role in many aspects of business management. To the extent that environmental costs exist in almost every phase of a business’ operations, EA practices can support improved decision making in many different applications throughout an organization. Following are descriptions of some of the more common applications to date.
EA Informs Product/Process Costing
Businesses generally look to the marketplace to gauge the demand for a product and, from that demand, the price the market is willing to pay. They then compare that price to their cost of making the product to determine whether or not there is adequate profitability to justify its production. Of course, producers consider other factors – such as market positioning, customer retention, and long-term sector growth – when deciding what and how much to produce, but the costing of the product and the processes that produce it remains fundamental.
When environmental costs are not adequately allocated, cross-subsidization occurs between products. In most cases, different products are made by different processes, and each process tends to have a different environmental cost. For example, consider a facility with two processes, A and B, that use the same number of direct labor hours for a batch of product. Process A, however, uses hazardous chemicals whereas process B does not. The facility incurs environmental costs from the use of the hazardous chemicals in a number of ways: specification and procurement of the chemical which includes evaluation of Material Safety Data Sheets; design of the process to minimize worker exposure; shipping costs associated with transporting hazardous chemicals; monitoring, reporting, and permitting to meet applicable regulations; employee training in handling and emergency response; storage and disposal costs; and liability for the chemical from purchase to grave. In addition, there may be less tangible costs such as tarnished corporate image and inability to meet delivery or quality requirements.
If all of these costs are bundled as ‘environmental’ overhead and allocated to processes A and B on the basis of direct labor hours or production volume (both common practices), products made by process B are in effect subsidizing those made by process A. In other words, a traditional accounting system would show process B to be more costly than it really is and process A to be less costly. Armed only with this information, managers are inclined to overestimate the profitability of products made by process A and correspondingly underestimate the profitability of those made by process B. Eventually, this type of accounting can put the firm at a considerable competitive disadvantage. Conversely, by more accurately allocating these costs, managers can make better decisions about product mix and about where cost-saving opportunities lie, thereby putting their firms ahead of the competition.
EA Informs Capital Investment Decisions
Companies develop and enlarge their businesses by investing in their human and physical capital. Their long-term financial viability hinges on the strength of these investments. Generally, a company’s investors demand at minimum a return comparable to that which they can obtain through other investments. This demand places pressure on companies to invest their limited capital funds wisely. Environmental costs are often a significant component of capital and
determine whether and to what extent the benefits of such investments will exceed the costs. But to achieve these results, managers must first be able to define and measure these environmental costs in a systematic and consistent fashion.
One specific application of EA for capital investment analysis is Total Cost Assessment (TCA); a method by which investments, particularly environmental investments, can be evaluated in a way that more accurately reflects their profitability potential. The four basic elements of TCA that make it more informative than conventional analysis are: (1) a more comprehensive cost inventory that includes less direct, less tangible costs3; (2) allocation of costs that are typically assigned to overhead accounts, and either allocated on the basis of an inappropriate cost driver or not allocated at all; (3) evaluation of projects using longer time horizons in order to better capture the full benefit of the investment, a significant portion of which may be realized after the first 2-3 years; and (4) profitability indicators that account for the time value of money, making the results more realistic and reflective of an investment’s true cost or benefit.
Evaluating environmental projects using TCA helps put them on equal footing with other projects competing for capital funds. Projects that appear to be financially weak using conventional analyses may look considerably stronger and more competitive once their true return has been identified. For example, an expensive investment in a process change to accommodate a switch to an aqueous solvent may appear to be a poor investment with a long payback if only direct labor and material costs are considered over a three-year time period. However, if the full environmental costs of the existing process – such as solvent disposal costs, regulatory permits, worker health, and liability for accidental spills or leaks – are allocated to the process and included in the analysis, the less visible cost savings associated with the switch, considered over a longer, 7-8 year period, may well yield an impressive rate of return and a shorter-than-expected discounted payback. Of course, TCA does not ensure profitability a priori. It does however ensure greater transparency, clarity, and rigor in making capital investment decisions.
EA Informs Strategic Planning
Understanding the nature and magnitude of its costs is vital to the successful, long-term operation of any firm. When planning strategically, businesses look externally at the markets they serve, and internally at the resources they control. They then are in a position to decide where the best profit potential lies and what strategies will be necessary to achieve that potential. Profit potential can be substantially affected by environmental costs and how they are managed. In this way, EA is a critical strategic element of long-term commercial success.
Looking outward, many businesses see customers that are increasingly more demanding in terms of quality, of which environmental performance is an integral component. Many companies that produce consumer products are finding lucrative markets in green goods where customers, who will often pay a premium for a green product, believe they can positively impact environmental quality through their purchasing decisions. Similarly, companies producing raw materials and intermediate goods are finding more stringent customer expectations with regard to environmental performance of both their operations and their products. To many consumers and buyers, good environmental management is indicative of a firm’s general management and of its ability to consistently produce reliable, high-quality products. To the extent that the application of EA
concepts encourages financially sound investment in the production of products of higher environmental integrity, it can strategically position a business to seize this powerful market opportunity.
Customers and other stakeholders, to varying degrees, are calling for increased environmental responsibility on the part of businesses. Concepts of environmental accounting can be applied to the development of environmental management systems, including those consistent with the increasingly prevalent ISO 14000 standards, that enable strategies to answer that call. As firms position themselves to enhance the structure of their systems, EA will be integral to their development and capabilities. These systems coordinate EA-based data to provide managers with information to better understand the impacts of their decisions. This information can be used strategically to drive improved environmental performance.
A strategic vision and corresponding management commitment is necessary to fully integrate environmental costs into a company’s business decisions. Viewed over the long term, those firms that properly account for the true environmental costs of their operations will be in a superior position to meet tomorrow’s competitive challenges.
For a more complete description of EA concepts, readers are encouraged to see EPA’s An Introduction to Environmental Accounting As A Business Management Tool: Key Concepts and Terms (EPA 742-R-95-001), available on the Internet at http://www.epa.gov/opptintr/acctg/
2. Overview of Cases
Case Selection
We selected cases from a broad survey of environmental cost accounting literature that documents actual applications of EA. The selection represents the result of library and Internet searches and discussions with EA practitioners. It contains a variety of applications of EA in a number of different industries and, we believe, presents a fairly comprehensive compilation of published EA cases as of the start of 1997. In addition, three cases were submitted by companies with an ongoing interest in the Environmental Accounting Project.4 This collection is intended to be the beginning of a living database of environmental accounting snapshots that demonstrate results from applying EA to specific business decisions.5
We selected those cases that quantifiably demonstrate uses of EA in business decision-making. These studies show how businesses more carefully account for costs that are typically left out of conventional accounting practices and analyses. These costs, typically direct or indirect environmental costs obscured in overhead accounts, were in most cases significant and material to business decisions.
The cases reviewed in this report also tend to use profitability indicators that consider longer-term implications for operating costs, and consider the time-value of money when assessing and comparing profit and payback. Accounting practices that look beyond the next quarterly report better reflect the true cost of the processes they measure. Environmental costs and benefits often materialize over a time frame longer than that considered in conventional analyses. Applying EA concepts in business decisions, as shown in these case studies, can improve upon conventional systems by capturing these costs and savings to better inform management decisions.
Generally, we included case studies that used environmental accounting to provide better information about a product, a process, an investment, or a business operation. The cases represent a variety of approaches to the application of EA, but all have in common the incorporation of environmental costs into accounting practices, providing firms with both economic and environmental incentives to reduce waste and produce more efficiently.
Organization of the Cases Business Decisions Examined
The cases are organized into three groups, based on the business decisions analyzed using environmental accounting concepts:
1. Capital Investments (24 cases). Many improvements to increase resource efficiency and reduce material use and pollution require capital expenditures. Methods of investment analysis, such as total cost assessment (TCA) – a comprehensive approach to evaluate the profitability of current business practices and pollution prevention (P2) investments – are
particularly useful in capital budgeting decisions when a firm seeks to assess the profitability of a potential investment or to choose between several potential investments.
2. Product/Process Costing (9 cases). Better information regarding operating costs is useful to a variety of pricing, product mix, investment, and strategic decisions. Understanding the true costs and risks of operations enables managers, engineers, and operators to make better decisions about how to run and improve their businesses.
3. Strategic Planning (6 cases). Quantifying the relative environmental costs of different processes and P2 opportunities provides the information necessary for prioritizing P2 projects, allocating resources, and determining a firm’s environmental strategic direction. For example, with scarce capital funds firms find the application of EA concepts to be a valuable means of directing investment towards those opportunities that will provide the greatest return. Measuring the environmental costs and benefits of various activities throughout a facility or business gives managers information they need to plan strategically.
These three categories clearly overlap, and there are several case studies that could fit comfortably into more than one. The purpose of classification is not to draw artificial distinctions between types of EA applications, but to organize and illustrate the variety of business decisions EA can support. In the end, EA concepts can be employed to manage information that can be used in as many ways as businesses can creatively devise. A critical element of being a successful manager is to know what needs to be known and to utilize information about business operations to continuously improve them. The three categories cover the major ways in which environmental cost information has been used in the case studies.
Industry Sectors Examined
Within each section, the cases are grouped first by industry sector and then alphabetically. The total of 39 cases breaks down in the following manner:
Table 2. BREAKDOWN OF CASES BY INDUSTRY SECTOR
NUMBER OF CASES INDUSTRY SECTOR
9 Chemicals 10 Metal finishing/fabrication/use 4 Printing 3 Electronics 3 Paper 2 Electrical utilities 8 Other*
*includes, for example, pharmaceuticals, health care products & auto manufacture
Size of Companies Examined
The companies in these case studies range in size from small, privately-held facilities with fewer than 20 employees to large, multinational corporations, such as Polaroid, Baxter, and DuPont. Table 2 suggests the firms also represent a broad range of the commercial sector, supplying both products and services to intermediate and end-use customers. This diversity demonstrates that both large and small businesses can often benefit from increasing incorporation of environmental
costs into business decisions. Potential EA applications lie along a spectrum of complexity and can be tailored to the needs of each business. However, there are costs to applying EA concepts, even on an ad-hoc basis, and these costs have to be measured against expected benefits. Some of the cases, however, show the investment in systems that incorporate EA concepts to be a worthwhile investment with initial costs that may be amortized over many years of improved decisions and decision-making.
Profile of the Cases
Why Was the Case Study Performed?
What motivated firms in the case studies to experiment with, or adopt EA methods? The firms listed here did so for a variety of reasons and in a variety of settings. Some were reporting on broader company or government policy issues of which EA was an integral component.
Some of the cases report on EA applications implemented by teams assembled within a firm, usually as part of a proactive management effort to improve cost accounting practices. The underlying aim of many of these efforts was to improve management decision making capabilities by providing a stronger foundation upon which smart decisions could be made. In these cases, identification and understanding of environmental operating costs led to strategies for making efficiency and environmental improvements. However, much of the reported EA work was performed by, or in collaboration with, external research and consulting organizations, owing to most firms’ lack of experience in incorporating many of their environmental costs into their business decisions. In some cases, an external organization approached a firm about collaborating on a case study in conjunction with an EPA- or state-funded initiative.
In the cases where environmental costs were better integrated into business decisions with external support, the case study usually reports on a financial analysis of an environmental investment, often performed retrospectively (i.e., after the investment had already been made). A retrospective analysis allows the use of real operating cost data instead of estimates from the new investment in the financial analysis. These analyses help the firm to understand the full economic impacts of its investment to inform future decisions, highlight the difference between TCA and conventional accounting methods, and provide a model for other firms desiring to perform their own analyses. Roughly 20% of the cases in this report document analyses that were performed retrospectively.
Costs Considered
To what extent do the case studies embrace a wider range of costs beyond the conventional (those typically recognized in cost analyses, such as raw materials and capital equipment)? We earlier noted that an important element of EA is the consideration of a broader spectrum of costs. However, the majority of the case studies include only conventional and non-conventional/hidden costs6 in their quantitative analyses; a few include only conventional costs. This suggests the difficult nature of identifying, isolating, allocating, and incorporating less tangible costs (those relating to stakeholder relationships or other costs that may be significant but similarly difficult to
to be sufficiently profitable even in the absence of less tangibles. In other instances, firms that were unable to quantify liability/contingent and/or less-tangible costs did consider them qualitatively. Like other management concepts, the application of EA concepts supports decision-making but does not prescribe it. Ultimately, decisions are made considering not only readily measurable cost, but also “softer” factors such as corporate image, employee safety, or contingent environmental liability. In several of the capital budgeting studies, qualitative considerations played an important role in persuading the company management to make a P2 investment.
A number of cases quantify liability/contingent costs. For example, one firm considered the potential liability of a PCB transformer spill or fire.7 Conservatively considering the probabilities and associated costs of cleanup, litigation, and lost production, the analysis showed an accelerated phase-out of the transformers to be cost-effective. This example shows how the inclusion of costs omitted from conventional analyses might lead managers to sharper, more proactive management strategies.
A few case studies identify other less-tangible costs and quantify them as part of an analysis. One study of the impacts of a forestry company on the commercial value of the forest estimated values of wildlife and tourism costs.8 Two small printing companies estimated an increase in product revenues from improved ability to meet customer demand.9 In these cases, cost estimates admittedly are rough, but even a rough, conservative estimation reflects the true economics of a current or proposed practice better than an estimation of zero, the value implied by the exclusion of a less tangible cost.10
Financial Results
What is the range of outcomes reported in the three categories of EA? The Capital Investments cases evaluate the profitability of past or proposed investments, or compare the economics of several P2 investment proposals. Almost all of the Capital Investments analyses calculated a net present value11 (NPV) for the project; these values ranged from negative $1.4 million to $11 million, with most in the range of $10,000 to $100,000. Some of the highest include: a 5-year NPV of $495,860 for a screen printer; an 8-year NPV of $352,814 for an electronic equipment manufacturer; and
a 15-year NPV of $11,633,835 for a diversified chemical company. Two of the 24 Capital Investments cases had negative NPVs, but both of these projects contained significant qualitative benefits. One of the projects was approved on the basis of these qualitative benefits. Many of the
7 See the Large Firm in Auto Industry Snapshot on Page 88. 8
See the A Forestry Company Snapshot on Page 78. 9
See the A Screen Printer and A Small Lithographic Printer Snapshots on pages 41 and 43.
10 See the US EPA’s Valuing Potential Environmental Liabilities for Managerial Decision-Making: A Review of Available Techniques (EPA 742-R-96-003) for references to means of estimating liabilities.
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CAPITAL INVESTMENTS CASE HIGHLIGHTS
• lowest investment NPV = negative $1,400,000
• highest investment NPV = $11,600,000
• typical investment NPV = $10,000 to $100,000
• small firm (screen printer): dry film imaging system investment, NPV = $496,000
• medium-sized firm (electronics): ultrasonic cleaning system investment, NPV = $352,000
• large firm (chemical company): byproduct recovery system investment, NPV = $11,600,000
analyses for which a discounted payback was calculated would pay for themselves in under three years; all but two had paybacks under five years. In a few cases, however, the encouraging financial analysis was insufficient to override doubts about unproved technology, so project implementation was put on hold.
Product/Process Costing, the second category of EA cases, covers both facility-level and product/process level analyses. Most of these studies were undertaken as collaborative efforts; a number are part of a World Resources Institute study, one was funded by the UN to improve accounting and reporting, and another was supported by the Illinois Waste Management and Research Center to demonstrate improved process costing. Three studies in this category were initiated through corporate programs to improve environmental cost accounting. The Product/Process Costing cases all helped identify significant environmental costs that previously had not been recognized. The results convinced some of the firms to pursue P2 projects or to continue to refine their EA practices. Others assisted firms to consider potential benefits of enhanced corporate image, of improved customer satisfaction and employee morale, and of the competitive advantage from selling environmentally-friendly products.
Finally, the Strategic Planning cases also cover both facility-level and product/process-level analyses. Several were performed as a result of the New Jersey Planning Process12, which requires an assessment of the costs of using or generating hazardous substances for each process in order to identify P2 opportunities. Others were motivated by corporate commitment to P2 and/or initiation of an accounting system that better incorporated environmental costs. Most of the Strategic Planning cases showed that P2 investments could actually save money and that EA helped the facility prioritize P2 options. These applications of EA tended to set the stage for a systematized integration of improved cost accounting into ongoing business initiatives to implement efficiency improvements.
3. Environmental Accounting Snapshots
Selection RationaleTo give readers more insight into the actual application of EA, 39 Snapshot summaries of the case studies reviewed are presented in this section. These Snapshots cover a spectrum of applications, and demonstrate the versatility of EA as well as the bottom-line outcomes of a range of applications.
Each snapshot contains the following information: • Business Decision
• Business Benefits • Company Profile
• Why Was Project Performed? • Project Description • Analysis • Financial Parameters • Financial Results • Contact • Source(s)
A DIVERSIFIED CHEMICAL COMPANY
A DIVERSIFIED CHEMICAL COMPANY
CAPITAL INVESTMENTS
Study of a set of process changes that would, among other things, convert byproduct into useable input material, potentially decreasing landfill waste by 3.8 million pounds per year. For a capital investment required of $4.96 million, annual operating costs are expected to decrease by $2.29 million.
This $12 billion company has about 450 facilities around the US and throughout the world. This particular project focuses on the activities at a group of three plants located in relatively close physical proximity. Plant 1 manufactures an intermediate product I, which is delivered to Plant 2 and Plant 3, each of which converts I into final product F. Not all of I is converted to
F, however. A portion remains as I, and a portion is unavoidably converted to a byproduct, B.
B and I are combined and returned to Plant 1 for reprocessing. Plant 1 recovers most of I, while B and the unrecovered I are landfilled.
In the mid-1970s, an alternative process was developed whereby B could be converted back into I. This recovery facility would be located at Plant 2, and would process the effluent streams from Plant 3 as well as that from Plant 2. The recovered I would be sent to Plant 1 for purification. The recovery facility at Plant 2 would produce a waste stream that would need to be landfilled. The waste disposed annually by Plant 1 would decrease by 4.3 million pounds, while that disposed by Plant 2 would increase by 0.5 million pounds, resulting in an overall waste decrease of 3.8 million pounds per year.
Initially, the company’s consideration of the process change centered on recovery of wastewaters containing B and I. However, during the mid-1980s, the company became interested in converting B to I as a vehicle to increase production of I, in order to expand production of F by Plant 2. A detailed study done at that time indicated a 29 percent return on investment for the project. Although the group of plants as a whole would see a decrease of 3.8 million pounds per year, no action was taken. This was in part because Plant 2, where the investment would be made, would see increased operating costs due to operations at the recovery facility plus the addition of 0.5 million pounds to its annual waste stream. Because of this, Plant 2 opposed the implementation of the project.
In addition to the recovery of I and reduced waste generation, this project offers several other benefits. First, since I and waste are removed from the wastewater at Plant 2, only I is shipped to Plant 1, reducing shipment costs. Second, the flow to the I purification system at Plant 1 is reduced, freeing up processing capacity in the system, and obviating the need for a major capital expansion project in the event of the need to increase production. This preserves and
BUSINESS
DECISION
COMPANY PROFILE
⇒ Location: About 450 facilities in 40 countries.
⇒ Size: Not reported
⇒ Annual Revenues: $12 billion
⇒ Business: Manufacturer of chemicals for sale to industry.
BUSINESS BENEFITS WHY WAS PROJECT PERFORMED? PROJECT DESCRIPTION ANALYSIS
A DIVERSIFIED CHEMICAL COMPANY
The capital investment required is $4.96 million. Annual operating costs are expected to decrease by $2.29 million. This decrease is due primarily to the value of the recovered I, $2.47 million annually. This value is modified by a $220,500 increase in labor costs and a $44,100 decrease in waste management costs.
The total cost analysis (TCA) makes no
modifications to the company analysis discussed above. However, an additional category of cost is considered: estimated potential liability cost. This cost represents the financial liability which may be avoided by reducing the B waste stream. At present, this waste is disposed in a privately owned industrial landfill. Although the company has no reason to believe the landfill is now or may in the future be subject to remedial action, this project may reduce a degree of incremental financial risk which a conservative project analysis out to account for. This risk is represented by a one-time $4.6 million cost in year ten of the investment.
The financial analysis uses a discount rate of 12 percent, an inflation rate of 5 percent, a net tax rate of 34 percent, and double declining balance/straight line depreciation over a fifteen year period.
For the TCA, the 15 year NPV is $11,633,835; the 15 year IRR is 41%; payback is 2.2 years. The company’s analysis, without the estimated potential liability cost, produces slightly different results: the 15 year NPV is $10,035,274; the 15 year IRR is 40%; and the payback period remains at 2.2 years.
Deborah Savage, Tellus Institute, 617-266-5400
White, Allen L., Monica Becker, and James Goldstein, Alternative Approaches to the Financial Evaluation of Industrial Pollution Prevention Investments. Prepared for NJ DEP. November 1991. And White, Allen L., Deborah Savage, and Monica Becker, Revised Executive Summary. June 1993.
COST CONSIDERATIONS Year One Savings
Recovered I $2,470,000
Waste Management $44,100
Total Savings $2,514,100
Year One Costs
Additional Labor $220,500 Total Costs $220,500 FINANCIAL PARAMETERS FINANCIAL RESULTS CONTACT SOURCES
POLAROID CORPORATION
POLAROID CORPORATION
CAPITAL INVESTMENTS
A closed-loop batch still solvent recovery system had been left only partially completed for several years due to cash flow problems. Should the project be permanently canceled or should additional investments be made to complete the project?
The benefits of completing the still are heavily
dependent on a number of decisions related to chemical production. Five different scenarios were created and analyzed to represent these decisions, yielding 12-year net present values ranging from –$1.4 million to +$3.4 million.
Polaroid had designed a state-of-the-art, closed-loop, multipurpose batch still solvent recovery system for one of its facilities. At the time of the study, construction on the project had stopped for several years due to cash flow problems. The company had invested approximately six million dollars in the state-of-the-art system; an additional four million dollars was needed to complete the system as designed, primarily for equipment and control components.
During the construction delays changes to facility operations took place which, together with the significant construction downtime, rendered invalid the firm’s initial profitability analysis. Tellus Institute was asked to revisit the original project analysis with a particular focus on identifying and— if warranted and feasible— quantifying less tangible cost items.
When it was designed, the solvent recovery still was intended to provide two classes of savings: (1) reduced waste disposal fee costs, and (2) reduced raw materials purchases. During the construction delay, which lasted several years due to ongoing competition for capital funds, facility production plans changed, clouding the question of how many waste streams on site would be suitable for batch still recovery.
Adding to the complexity of the analysis were multi-facility production planning issues, company and government hazardous waste reduction goals and air emission regulatory issues. For example, the production facility at which the batch still had been partially constructed had no other solvent recovery capacity on site. A second production site in the same region had several operating recovery systems, but all were operating at full capacity. This limitation on available solvent recovery capacity had clear production implications for production lines that used expensive raw materials or that generated solvent wastes deemed too expensive to simply ship off site for disposal. In addition, government regulations restricted shipment of wastes between the two sites for solvent recovery, further constraining the company’s flexibility for planning production. BUSINESS DECISION COMPANY PROFILE ⇒ Location: Waltham, MA ⇒ Size: 11,000 employees ⇒ Annual Revenues: $2.4 billion ⇒ Business: Specialty chemical
manufacturing BUSINESS BENEFITS WHY WAS PROJECT PERFORMED? PROJECT DESCRIPTION
POLAROID CORPORATION
Initially it was thought that easily quantifiable waste management costs, such as permit costs, labor costs for shipment manifesting, etc., would play a significant role in the analysis. It soon became clear that these costs, although relevant, were not decision drivers in an investment of this size.
It became clear that the primary cost drivers were of two types:
(1) The handler for one of the facility’s waste streams (designated Stream A) had had safety problems in the past, and the facility’s environmental manager would like an alternative treatment option. In absence of the batch still, the only alternative was cement kiln treatment, estimated to have a cost eight times that of the current handler.
(2) The ability of the facility to expand production to include a major intermediate product (Product X) that the firm was currently buying from another manufacturer. Without the batch still recovery system, the costs associated with waste disposal and raw material would make in-house production too expensive.
In addition, the completion of the batch still could be carried out at lower cost by modifying both its design and construction techniques. Five different scenarios were developed: 1) using the kiln to recover waste streams generated on-site, assuming they would otherwise be handled as they currently are; 2) as (1), but assuming Stream A’s would otherwise face cement kiln disposal; 3) as (1), but implementing the lower cost completion method; 4) handling waste from production of Product X with the still, thus enabling the savings this on-site production would yield, and; 5) as (4), but implementing the lower cost completion method.
Not provided.
12-year NPVs ranged from –$1.4 million [for (1)] to +$3.4 million [for (5)] for scenarios representing different waste stream mixes, capital expenditure, etc. The TCA helped illuminate the critical link between the batch still project and broader questions of production planning capacity and flexibility. In order to preserve these competitive capabilities, upper management approved funding for completion of the batch still project. The experience has informed continuing refinement of company’s cost accounting system.
Prior to the analysis of the batch still, Polaroid had looked at compliance without taking into consideration any possible benefits other than compliance itself. This project showed Polaroid that concurrent evaluation of compliance and engineering can enhance facility performance. The comprehensive analysis used in this project serves as a model for how Polaroid now analyzes all projects.
Deborah E. Savage or Allen L. White, Tellus Institute, 617-266-5400.
White, A.L., D.E. Savage, and A. Dierks, “Environmental Accounting: Principles for the Sustainable Enterprise.” Originally presented at the 1995 TAPPI International Environmental Conference, Atlanta Georgia, May 7-10 1995.
ANALYSIS FINANCIAL PARAMETERS FINANCIAL RESULTS INSTITUTIONAL CHANGE CONTACT SOURCES
POLAROID CORPORATION
White, Allen L. and Deborah E. Savage, “New Applications of Total Cost Assessment: An Exploration of the P2-Production Interface.” Pollution Prevention Review. Winter 1994-1995.
ALUMINUM PROCESSING COMPANY
ALUMINUM PROCESSING COMPANY
CAPITAL INVESTMENTS
What is the return on an investment in replacing a vapor degreasing system with an aqueous degreasing system?
For an initial investment of $155,365, the company realizes savings in the first year of $54,474. The 10 year net present value (NPV) of the investment is $101,292.
The Aluminum Processing Company (APC),
based in Fall River, Massachusetts, is a subsidiary of Lightolier-Genlyte, a national manufacturer and distributor of lighting products and accessories. APC fabricates aluminum reflectors for Lightolier’s track and recessed lighting products.
As a subsidiary of Lightolier-Genlyte (L-G), APC manufacturing processes are guided by the L-G corporate environmental policy. To meet the corporate environmental objectives, APC recently embarked on a pollution prevention program in its fabrication operations. The initial pollution prevention project included assessing the replacement of a vapor degreasing system with an aqueous degreasing system. The Massachusetts Office of Technical Assistance (MA OTA) assisted APC carry out the analysis.
The manufacture of aluminum reflectors involves several steps. First, thin aluminum sheet is cut to a specified diameter and passed on to a machine where they are pressed into the reflector shape. The aluminum is coated with oil prior to entering the pressing process. The newly formed reflectors are then cleaned (degreased), buffed, and either plated or painted before packaging and shipping. Prior to this project, this manufacturing process involved the production of pollutants at three points:
♦ a petroleum-based oil was used in the forming machinery,
♦ the cleaning process employed vapor degreasers which used trichlorethylene (TCE), and
♦ the paint spray booths produce toxic air emissions.
The use of TCE, in particular, was a concern to APC. In 1990, the company used 73.5 tons of TCE at a cost of approximately $425 per ton. Of this, less than 10 percent was recovered and recycled, and a cost of $425 per ton. In addition, the presence of TCE took a significant amount of staff time due to monitoring the degreasers, manifesting the TCE sent out for recycling, reporting spill and leak incidents, and SARA Title three compliance reporting. In addition, the presence of TCE required that all employees receive 8 hours of annual training. Finally, every 50 gallon drum of TCA required about 20 minutes to label upon both receiving and shipping.
In an effort to tackle all three problems simultaneously, APC decided to substitute a non-petroleum-based oil in the forming machinery and replace one TCE-based degreaser with an aqueous solution model. Another degreaser was replaced with an integrated aqueous
BUSINESS
DECISION
COMPANY PROFILE
⇒ Location: Subsidiary of Lightolier-Genlyte in Fall River, MA.
⇒ Size: 500 employees
⇒ Annual Revenues: $110 million (1990) ⇒ Business: Manufacturer of aluminum
reflectors for Lightolier’s track & recessed lighting product lines.
BUSINESS BENEFITS WHY WAS PROJECT PERFORMED? PROJECT DESCRIPTION
ALUMINUM PROCESSING COMPANY
degreaser/electrostatic powder coater unit. The powder coater is a method of applying a coating that eliminates most of the emissions associated with spray painting.
The costs associated with purchasing and installing the new equipment is estimated at $155,365, of which $134,670 can be capitalized and depreciated over the life of the project. Annual operating and maintenance costs associated with the new equipment total $2,000. In addition, annual detergent purchase costs for the aqueous degreaser total $10,500.
The annual cost savings associated with discontinuing the current process are greater than the annual costs associated with the new equipment. The elimination of TCE purchase saves $31,104 annually. Elimination of spent solvent disposal saves $3,120. Annual cost savings from eliminating maintenance for the old system are approximately $20,000 per year. Labor associated with TCE (incident reporting, monitoring/manifesting, labeling) are eliminated, saving $11,850 annually. In addition, the absence of TCE reduces the time needed for mandatory employee training, resulting in a $900 savings. Starting in year two, APC saves $1,100 annually in reduced regulatory fees paid to Massachusetts under the State’s Toxic Use Reduction Act.
Finally, the installation of the new equipment eliminates the need for an unavoidable overhaul of the current equipment. This saves $40,000 in year two.
The analysis uses a discount rate of 15 percent, an inflation rate of 5 percent, a net tax rate of 39 percent, and straight line depreciation over a ten year period.
The 10 year net present value of the project is $101,292. Not provided.
Northeast Waste Management Officials’ Association and the Massachusetts Office of Technical Assistance, Improving Your Competitive Position: Strategic and Financial Assessment of Pollution Prevention Projects: Instructor’s Guide. 1994.
COST CONSIDERATIONS
Year One Savings
Solvent Purchase $31,104 Solvent Disposal $3,120 Eliminated Maintenance $20,000 Labor $11,850 Reduced Training $900 Total Savings $66,974
Year One Costs
Operating/Maintenance $2,000 Detergent Purchases $10,500 Total Costs $12,500 ANALYSIS FINANCIAL PARAMETERS FINANCIAL RESULTS CONTACT SOURCE
DEBOURGH
DEBOURGH
CAPITAL INVESTMENTS
Are the following investments justified: (1) conversion from a high solids, baked enamel paint to TGIC polyester powder coatings; and (2) insulation of paint drying and curing ovens. For an initial investment of $289,029, DeBourgh saves $142,673 in operating costs in the first year. The discounted payback period is 4.17 years.
DeBourgh Manufacturing Company is located in La Junta in Southeastern Colorado. The firm manufactures all-welded athletic and corridor lockers for schools and industry. DeBourgh has 80 employees, and its annual sales are around $6 million.
DeBourgh has an active resource management program responsible for finding ways to increase profits through pollution prevention and energy efficiency improvements. DeBourgh is a partner in the DOE Climate Wise program.
DeBourgh has also participated in the DOE Energy Conservation/Pollution Prevention Assistance for Industry program. A 1995 assessment performed by Colorado State University (CSU) helped DeBourgh personnel identify a number of pollution prevention and energy efficiency projects that offered and increases in productivity and profit.
The project analyzed here is a combination of two recommendations from the CSU report. The report recommended that DeBourgh (1) convert from a high solids, baked enamel paint to TGIC polyester powder coatings and (2) that the paint drying and curing ovens be insulated. Together these efforts demonstrate the effects of materials substitution and process improvements on raw materials and energy usage, waste disposal, and other operating costs. DeBourgh completed the paint conversion in February-March, 1996 and the oven insulation modification in April, 1996. Both projects were financed internally.
The powder coating system installed by DeBourgh is a feature-enhanced, custom designed, semiautomatic system with oscillating spray guns and three manual stations. The system is used for roughly 75% of DeBourgh’s production (the remaining 25% of products require liquid paint). The new electrostatic system doubles DeBourgh’s painting capacity and reduces the number of rejects by almost 50% with absolutely no hazardous emissions to the outside environment. The total cost of the powder coating system, including installation, delivery, associated upgrades to the fire system, and purchasing expenses, is $289,029.
The oven insulation reduces heat loss from the existing paint drying and curing ovens. Including installation, the cost is $18,340.
A variety of annual cost savings are associated with the conversion from liquid (solvent-based) paint to powder paint. First— although the costs per unit of powder paint and liquid paint are similar— less powder paint is wasted because it has a higher transfer efficiency, thus less is
BUSINESS
DECISION
COMPANY PROFILE ⇒ Location: La Junta, CO ⇒ Size: 80 employees
⇒ Annual Revenues: $6 million
⇒ Business: Manufacturer of all-welded athletic and corridor lockers for schools and industry.
BUSINESS BENEFITS WHY WAS PROJECT PERFORMED? PROJECT DESCRIPTION ANALYSIS
DEBOURGH
purchased. Powder paint’s higher transfer efficiency also allows DeBourgh to replace the paint booth air filters less often. DeBourgh expects no change in paint storage costs or in paint equipment electricity use.
Powder paint equipment can be cleaned with compressed air, so DeBourgh reduces its purchases of xylene, which is used as a cleaning
solvent for the liquid paint equipment. DeBourgh has an in-house solvent recycling unit that allows xylene to be reused, but the recycling process produces a hazardous sludge waste. This waste is regulated under RCRA, and is expensive to dispose. The reduction in solvent use allows DeBourgh to save on these disposal costs, regulatory paperwork, storage, and liability— as well as on the electricity and labor required by the recycling unit.
Other labor cost savings result from increased painting automation and reduced paint booth cleanup. Worker health and productivity should also improve, because there will be fewer hazardous air emissions from the liquid paint and cleaning solvent (powder paint has no air emissions). In addition, the reduction in air emissions allows DeBourgh to save on annual air emissions fees, air quality monitoring, regulatory paperwork, and plant air ventilation (which includes heating the make-up air).
In total, DeBourgh is able to quantify $132,463 of savings associated with the powder coating system. However, this figure does not include unquantified savings such as improved throughput, quality, and productivity; reduced liability, storage costs, and regulatory paperwork; and reduced worker exposure to VOC emissions. The oven insulation reduces DeBourgh’s reliance on natural gas by $10,210 annually.
The analysis uses a project lifetime of 10 years, real cost of capital of 9%, a net tax rate of 39%. Capital costs are depreciated over 10 years using the straight line method.
The 10-year NPV is $264,865; the 10-year IRR is 26.8%; the discounted payback period is 4.17 years.
Deborah Savage, Tellus Institute, (617) 266-5400.
Colorado State University Industrial Assessment Center, Energy Conservation & Pollution Prevention Assessment Report No. CO0332. March 1995.
Savage, Deborah, and David Miller, “Workshop on Innovative Financing Results”. Originally presented at the “Energy Efficiency & Pollution Prevention” conference sponsored by the Department of Energy. Denver CO, January 23, 1997.
COST CONSIDERATIONS
Year One Savings
Raw Materials $39,000 Labor $73,000 Waste Management $12,000 Utilities $14,673 Regulatory Compliance $4,000 Total $142,673 FINANCIAL PARAMETERS FINANCIAL RESULTS CONTACT SOURCES
HYDE TOOLS, INC.
HYDE TOOLS, INC.
CAPITAL INVESTMENTS
Analysis of the purchase of system to recycle wash and rinse water, and quench oil from a heat treating process line.
The initial investment of $20,055 accrues annual savings of $9,360. The 10 year net present value of the investment is $14,601.
Hyde Tools is a third generation, family-owned
manufacturer of a range of surface preparation and maintenance hand tools. The company is a major employer in Southbridge, and has always striven to provide comfortable working conditions for its employees. The company’s purchasing manager has taken an active interest in pollution prevention and Hyde, and has implemented a number of low-tech low-cost pollution prevention projects.
In 1990, the company set a goal of zero discharge by 1992. The plan to attain the goal had a number of components, many of which were intended to reduce the use of town water and sewage services. The company first decided to address discharges from the heat treatment process line for the company’s knives and scrapers. The Massachusetts Office of Technology Assistance helped the company carry out a total cost analysis (TCA) of this project.
Hyde Tools manufactures a number of wall scrapers and blades in several different sizes and shapes. All of these blades are made of carbon steel, and undergo a heat treatment process to improve the performance of the material. This process is as follows: blades are loaded onto racks which take submerge them in a tank filled with molten salt (1600–1800oF). The rack is then plunged into a 500 gallon tank of quench oil in order to cool the blades. The blades are then washed and rinsed twice to remove the oil.
The heat treatment process accumulates 12 drums of equal parts water and oil every six weeks. The waste is sent off site for reclamation and water removal. The company determined that in-process recycling offered the best solution to eliminate this discharge. This recycling system would not only recycle wash and rinse waters, but would also recycle the quench oil. The proposed system would reduce the cost if reclaiming the quench oil, eliminate the pumping of oil to the drum, and recirculate wash and rinse water to the extent feasible, without discharging to the sewage system.
The total expenditure for the purchase of the filtration and recycling equipment is $20,055. This price includes training in the use and monitoring of the system. Installation costs amount to about $5,000. In addition, a float switch and associated alarm system (for the purpose of monitoring fluid levels) need to be purchased ($250) and installed ($500).
Annual operating costs associated with the new system total $3,900, and comprises purchase of filtration medium ($1,300) and disposal of used filtration medium ($2,600).
BUSINESS
DECISION
COMPANY PROFILE ⇒ Location: Southbridge, MA ⇒ Size: 250 employees
⇒ Annual Revenues: Not reported ⇒ Business: Family-owned
manufacturer of surface preparation and maintenance hand tools.
BUSINESS BENEFITS WHY WAS PROJECT PERFORMED? PROJECT DESCRIPTION ANALYSIS
HYDE TOOLS, INC.
These increased costs are offset by annual savings of $13,260 incurred due to discontinuing the current process. This total is embodies the following: 20 percent reduction in water usage ($8,760); permit fee savings incurred due to moving from a major to low discharge water user ($4,200); and, savings associated with reduced testing requirements ($300).
The analysis uses the following economic
parameters: 40 percent net tax rate; 15 percent discount rate; 5 percent inflation; straight line depreciation over ten years.
The 10 year net present value of the investment is $14,601. The project was approved on the basis of its quantitative and qualitative merits, and installed in May 1991.
The success of this project demonstrated to Hyde the potential benefits that pollution prevention projects can provide. The results of this project encouraged Hyde to carry out several additional pollution prevention projects, including the following:
• Change in procedures to prevent plant spills from being discharged into the town’s sewer system;
• Elimination of the use of 1,1,1 trichloroethane;
• Replacement of kerosene with a water-based cleaner for removing polishing compounds ($12,825 annual savings);
• Replacement of fluorescent lighting with high pressure sodium or metal halide lighting ($48,000 annual savings)
Not provided.
Northeast Waste Management Officials’ Association and the Massachusetts Office of Technical Assistance, Improving Your Competitive Position: Strategic and Financial Assessment of Pollution Prevention Projects: Instructor’s Guide. 1994.
COST CONSIDERATIONS
Annual Savings
Water Usage $8,760
Reduced Permit Fees $4,200
Reduced Testing $300 Total Savings $13,260 Annual Costs Filtration Medium $2,600 Filter Disposal $1,300 Total Costs $3,900 FINANCIAL PARAMETERS FINANCIAL RESULTS INSTITUTIONAL CHANGE CONTACT SOURCE
A JEWELRY COMPANY
A JEWELRY COMPANY
CAPITAL INVESTMENTS
Is a capital investment in a chemical-reducing ethyl acetate still financially justified?
For an investment of $16,000, the company would realize annual operating savings of $18,000 in each of the first five years.
This company has long demonstrated a genuine concern for the well-being of its employees and its
community. It has taken an active posture in addressing the environmental concerns of the town in which it operates, often acting well in advance of regulations. Although the facility was in compliance with all applicable regulations, the Environmental Manager was eager to reduce the volume of ethyl acetate used to strip lacquer from its plating racks. The high cost of both the purchase and disposal of the ethyl acetate presented an opportunity for cost savings.
The analysis was conducted by the company’s VP of Environmental Affairs with the help of a Massachusetts Office of Technical Assistance representative. A previously submitted proposal for an investment to enable reduced ethyl acetate use had not received corporate approval, despite an estimated 11-month payback. The VP wanted to resubmit the proposal using a more formal financial analysis. The study was included in a training manual for using financial assessment for pollution prevention projects prepared by the Northeast Waste Management Officials’ Association.
To produce jewelry with a white finish, the facility had determined that silver was the best metal in terms of both aesthetics and manufacturability. To prevent tarnishing, silver-plated pieces must be coated in lacquer prior to finishing. To perform this process, the pieces are placed in plating racks that are dipped in lacquer. After the pieces have been removed, the racks are stripped of the lacquer using ethyl acetate. Once the ethyl acetate is exhausted, it is disposed of as hazardous waste.
The facility investigated options for reducing the volume of ethyl acetate it purchased and disposed of and decided that a solvent recovery still offered the best solution. Several vendors presented bids, among which was a $14,000 unit with a $2,000 installation cost that the facility chose. The new system would be placed in-line with the lacquer dipping operation and would allow the ethyl acetate to be recovered and reused until it lost its ability to strip the lacquer. The investment in a solvent recovery still was evaluated using a financial assessment method intended to include environmentally-related costs that are often omitted from investment analyses. The only initial investment cost was the purchase of the still and its installation. Annual operating cost savings from anticipated reductions in ethyl acetate purchases, disposal of spent ethyl acetate, manifesting labor, and Toxics Use Reduction Act fees. The additional costs from operation of the still are an increase in utility costs to power the equipment and costs of disposing the still bottoms.
BUSINESS
DECISION
COMPANY PROFILE ⇒ Location: Sutton, MA ⇒ Size: 500 employees
⇒ Annual Revenues: Not reported ⇒ Business: Manufacturer and
distributor of jewelry, personal leather goods, and personal accessory items
BUSINESS BENEFITS WHY WAS PROJECT PERFORMED? PROJECT DESCRIPTION ANALYSIS
A JEWELRY COMPANY
The analysis incorporates these costs in a discounted cash flow model that assumes a five-year useful life of the equipment. The model uses a discount rate of 15% to represent the firm’s cost of capital, an inflation rate of 5%, and a corporate income tax rate of 40%. The model also considers the tax savings from a straight-line depreciation of the solvent recovery still investment.
The discounted cash flow analysis yields a net
present value (NPV) of $28,279 for the initial $16,000 investment. Compared to the 11-month simple payback calculated in the original company analysis, the discounted payback of this analysis shows that the investment would pay for itself in less than seven months. The weekly operating savings expected from the still installation is estimated to be over $300 just from purchase and disposal costs. The inclusion of depreciation tax savings contributes over $4,000 to the investment’s NPV.
Northeast Waste Management Officials’ Association (617) 367-8558 Massachusetts Office of Technical Assistance (617) 727-3260
Northeast Waste Management Officials’ Association and the Massachusetts Office of Technical Assistance, Improving your Competitive Position: Strategic and Financial Assessment of Pollution Prevention Projects:
